Profits from anxiety?

Welfare reform may increase anxiety among the public about what happens if they become long-term sick. But will it increase demand for income protection asks Edmund Tirbutt

Proposed changes to Disability Living Allowance, which pays up to £120 a week to help disabled people meet the additional costs of mobility and care, are certainly proving emotive. There have already been protests around Trafalgar Square, and disability rights groups are predicting that when the measures are introduced in April 2013 the media will be filled with images of people in wheelchairs chaining themselves to railings outside MPs’ surgeries. Worse still, some disabled people may actually take their own lives over the issue, it has been suggested.

But as the drama between the state and disabled groups plays out, some in the group risk industry believe a positive consequence will be a reinforcement of the idea that individuals, and their employers, need to protect their future as the state seeks to roll back its responsibilities.

The reforms, originally announced in 2010 but outlined in more detail in an interview with Work and Pensions Secretary Iain Duncan Smith in the Telegraph this May, involve replacing Disability Living Allowance (DLA) with a simpler more focused allowance called Personal Independence Payment for disabled people aged between 16 and 64. This is intended to eradicate abuse by using tighter criteria to consider the impact of disability, only making payments available to those medically assessed to have genuine need of support.

The initiative, which will require the assessment of 2 million people, is expected to cut DLA payments by around 20 per cent and lead to about 500,000 fewer claimants. Most controversially, even former soldiers with prosthetic limbs could have their payments reduced if they are considered to enjoy sufficient everyday mobility.

As the cuts kick in we would expect to see a lot on the national news as those with disabilities who are losing out seek publicity. It will be a personal and political disaster and it will also affect many employers

Neil Coyle, director of policy and campaigns at charity Disability Rights UK, says: “As the cuts kick in we would expect to see a lot on the national news as those with disabilities who are losing out seek publicity. It will be a personal and political disaster and it will also affect many employers as many people have DLA whilst in work to pay for transport costs. At a conservative estimate, around 25,000 people could lose work as a result of losing the benefit.

“In the context of the cumulative efforts with other cut-backs, losing DLA could be a tipping point for suicide. Our own research found that, when asked an open question on the impact of the changes, 9 per cent of respondents volunteered that losing the allowance could possibly make life not worth living. It’s right to tackle fraud but you can’t justify a 20 per cent cut in expenditure when Department for Work and Pensions statistics consistently show that fraud is only 0.5 per cent of the DLA bill.”

But could the upheaval faced by millions of long-term sick Britons herald a welcome new dawn for income protection?

Paul Avis, sales and marketing director at Canada Life, thinks it could. He says: “As a result, we would expect to see an increase in both group and personal income protection policy sales as people realise that State benefits are becoming more difficult to qualify for and do not provide as much financial assistance as income protection. It is becoming even more important that advisers understand that personal and group income protection insurance is a priority, rather than a peripheral part of personal and corporate financial planning.”

But nobody is expecting any immediate opening of the income protection floodgates. The proposals for Personal Independence Payment are still at the consultation stage and the Government’s propensity for making U-turns has become increasingly evident. Serious questions remain over the practicalities of implementation.

Pamela Gellatly, chief executive of Healthcare RM, says: “Those who don’t want to work will try every trick in the book to seem ill, so government assessors have a real challenge ahead of them. With a good assessor there are ways and means of finding out if someone is actually suffering but there must be question marks as to whether the government can find enough suitable assessors for the purpose.”

Furthermore, even if everything goes ahead swimmingly, the fact remains that similar announcements in the past relating to other aspects of welfare reform, such as changes to Incapacity Benefit, have not massively boosted demand for group income protection. So changes to Disability Living Allowance may only make an impact as one component of a prolonged drip drip effect of wider messaging.

Chris Ford, director of group risk at Jelf Employee Benefits, says: “We must continue to put across the message to employers that State benefits don’t pay out as much as people think. The idea that ’it won’t happen to me’ is still widespread and the message won’t start to get through until people actually go off long-term sick and their friends observe they are not getting the support that everyone thought they would. The whole thing is going to take years and this announcement is just one piece of the overall jigsaw. The industry has got to keep selling the positives of income protection.”

It could, of course, also take years for the economy to recover sufficiently to make significant new business growth in income protection a realistic prospect. All the educational progress in the world is never going to make employers feel that paying for income protection is a higher priority than actually staying in business.

Tim Miles, senior corporate risk & healthcare specialist at AWD Chase de Vere, says: “The whole issue ultimately boils down to whether employers can afford income protection in the current economic environment. If a firm in a competitive industry needs to keep costs under control to win contracts, income protection will always be a cost, even if offered via flex. The product has also historically been linked with more paternalistic employers and is based on a notion that jobs are for life, which has changed.

“I can’t see the DLA change creating a big increase in income protection business and, although we have experienced a slight increase in enquiries over the last 12 months, there has been nothing specifically since the recent announcement. Any progress with group income protection will be a slow burn and a lot depends on what happens to the NHS and to State benefits as a whole. Employers and employees need to understand that the government won’t be there for them.”

Welfare reform is a red herring that doesn’t reflect the real issues in the marketplace. Lack of penetration isn’t because people got a lot from the government but because of a lack of understanding of what they actually get from the government

Some commentators are in fact pinning far more faith in the type of TV advertising that has been carried out by Aviva and Unum to get over the key messages about the importance of income protection than they are in any publicity surrounding announcements about welfare reform.

Feedback from Unum suggests that this confidence is not misplaced. It reports that people who have seen its ads are four times more likely to have a conversation about income protection with an employer than those haven’t seen them, and that since this January 35 clients that used to cover only executives via group income protection have extended their schemes to cover the entire workforce.

Marco Forato, chief marketing officer at Unum, says: “In my view welfare reform is a red herring that doesn’t reflect the real issues in the marketplace. Lack of penetration isn’t because people got a lot from the government but because of a lack of understanding of what they actually get from the government. People who are disabled and can’t work get just over £5,000 a year and everything after that is means-tested, meaning that the majority of people on average salaries will not be able to maintain their lifestyle and will have to lose everything before they qualify.

“It’s about educating employers about the need for income protection. We need to work with them and with intermediaries so they can understand that income protection doesn’t have to be expensive to tie themselves up until retirement. And we also need to get the message to finance directors, not just to HR directors, that the company itself benefits from income protection. We’ve recently done an analysis showing that 40 per cent of premiums an employer pays comes back to benefit the company on top of any benefit paid to employees. Our approach will succeed regardless of whether we have welfare reform or not.”

GROUP INCOME PROTECTION SHOWS RESILIENCE

According to Swiss Re’s Group Watch 2012

  • Group income protection premiums increased by 0.1% in 2011 to £517,995,843, following a fall of 8.9% in 2010
  • The number of lives covered under group income protection schemes in 2011 was 1,836,020, an increase of 2.4% over 2010
  • Between 2010 and 2011 the number of group income protection schemes decreased by 1.5% to 17,307
  • In-force income protection premiums written within flex totalled £54,378,818 in 2011, an increase of 42.3% over 2010
  • 11.7% of group income schemes were written on a limited-payment basis in 2011, compared with 10.1% in 2010.

Ron Wheatcroft, technical manager at Swiss Re Life & Health, says: “The group income protection proposition is very strong at the moment and we don’t lose many schemes. But, to be honest, I don’t think that any welfare reform announcements have contributed towards this significantly.

“Research we carried out with consumers last September suggested that people understand the broad message that Welfare State benefits are being cut back on. But it also showed that they are not yet sufficiently engaged with the detail behind the message to do much about it as it’s a complex area to understand.”